WRB - WR Berkley

[gary17]

JBird
Thanks for the spreadsheet; what you stated make sense to me.

I am wondering though if you've given some thoughts on which of float or underwriting is the better value creation vehicle for P&C Insurers -

for companies like FFH and BRK we have great value investors that is creating above average returns on the float, which comes at low or no cost.  one the other hand we have companies like LRE.L whose underwriting is superior (65% combined ratio), but the float is earning 3% or so return...

[JBird]

My answer would be to just compare the NPV of investment income to the NPV of the underwriting P/L. In WRB case, the float is worth substantially more than the underwriting profits. In Lancashire's case, it's the opposite.

On a totally differing point- One thing I've had a bit of fun doing is valuing float in hindsight, specifically Berkshire's. If it's 1990 and you were all-knowing about what float would do over the next 23 years, what would you have valued it at? Since 1990 float has grown at 18% compounded annually. I don't know what actual investment returns from their float were, but two years ago Charlie said that Warren would sometimes earn 20-30% on float. Just say on average they earned 7% after tax. Float growing at 18% a year generating 7% investment returns, with a 10% discount rate, creates a valuation of 3.7 times nominal value of float! That boggles my mind.

[gary17]

Thanks. That is interesting. 

I am in the process of deciding between FFH and LRE.L - I think the math / NPV analysis is straightforward, but what I am trying to figure out is which model will be most predictable over the next, say, 5 to 10 years. 

FFH is really an investment fund and it's setup as a P&C insurance for the purpose of getting cheaper capital - as long as their combine ratio is not too far off from 100%, they've really achieved this.  Then it's a matter of Prem and his team's ability to grow the investment business.

LRE.L on the other hand is run by a man who knows how to run an insurance business and that is reflected in his track record.   (I wondered for $2B USD Prem should just buy Lancashire and let him run the insurance business while he grow the float...  And quit wasting his time on blackberry. )

I am kind of leaning towards FFH because the ability to produce market beating returns is unique, whereas it may be easier for someone to copy LRE's business model... 

[JBird]

I am in the process of deciding between FFH and LRE.L - I think the math / NPV analysis is straightforward, but what I am trying to figure out is which model will be most predictable over the next, say, 5 to 10 years.

That is a seriously smart consideration. I don't have the answer for you though.

[gary17]

I am in the process of deciding between FFH and LRE.L - I think the math / NPV analysis is straightforward, but what I am trying to figure out is which model will be most predictable over the next, say, 5 to 10 years.

That is a seriously smart consideration. I don't have the answer for you though.

In the end I went with fairfax. I think the investment model is probably easier to pass on if Prem isn't there.

[omagh]

It has been a good run since March 2010, but $13B market cap is definitely looking inflated.  What a ride!  Thinning out my position here.

- O

I just listened to the WRB quarterly call and all was pretty boring (not much change or new happening since Q2).

Bill gave a pretty good summary of why he feels a turn in the market (for the better) is coming: WRB loss ratios have historically been 8 to 10 points better than the industry; today WRB loss ratios are 6 points worse. This is a 14 point swing. Bill said either WRB has become incredibly stupid or competitors will experience large reserve deficiencies in the future (and lower capital will force them to write less business). At the same time these companies will not be able to raise traditional capital as easily (given current state of capital markets).

He is sticking with his 'prices will start turning in Q4' but he is also says that he could be wrong on timing (and that WRB does not run its business by predicting thses sorts of things).

The company had net earnings of $94 million in Q3 and bought back $88 million in common stock. The company in past conference calls has said that it is flush with capital and will be happy to buy back stock given current prices. Many good insurers are trading at around book value. To purchase another company the takeout price would likely need to be 1.3 or 1.4x BV (i.e. FFH purchase of Zenith). I really like the fact that WRB is buying its own stock back for about 1x BV. Year to date they have repurchased 12 million shares (8% outstanding). Today they just announced they have increased the buyback amount to 10 million and they increased the dividend from $0.05 to $0.07/share.

Book value is $26.36 and the stock closed today around $27.50/share. The insurance market looks to have stabilized so I would expect them to earn $0.60/share per quarter in the current environment. Should a hard market come and prices increase (and volume grow) earnings would increase dramatically. Looks to me to be a pretty good reasonable risk high return potential looking out a few years.